Question
New Article V(9) of the treaty provides that a PE can be deemed to arise in circumstances where services are provided by an enterprise with respect to the same or a connected project for customers who are either residents of the other state or who maintain a PE in the other state.
In addition, the technical explanation of the fifth protocol[Footnote 32] states that the new services PE provision applies only to the provision of services, and only to services provided by an enterprise to third parties. The CRA has indicated that the term “third party” should be interpreted to mean any person other than the person operating the enterprise in question, and that a related person is considered a third party for the purposes of the provision.
Consider a situation where a US-resident service provider is engaged by a US multinational to provide services, and some modest portion of that contract is provided in Canada to a Canadian-resident subsidiary of the US multinational customer that is the primary client. The service provider conducts no other business in Canada.
Could Article V(9) of the treaty apply to give rise to a deemed PE of the US-resident service provider?
Response
Depending on the circumstances, it appears that Article V(9)(b) could apply to give rise to a PE for the service provider in Canada. If it does, only the profits of the service provider that are attributable to the functions performed and the risks assumed by the provision of the services in Canada would be attributed to the deemed PE.